Demystifying Bankruptcy

Demystifying Bankruptcy

It is often said that bankruptcy lawyers speak a language of their own, and to some extent, this is true. However, once the linguistic barrier is overcome, the underlying concepts are both practical and straightforward. Through a series of quarterly articles, my aim is to demystify bankruptcy for our colleagues and demonstrate that it need not be intimidating. I will provide actionable insights designed to enhance your practice. Whether you are a litigator, family law attorney, real estate practitioner, or probate lawyer, these articles will help you understand the potential impact of bankruptcy filings on your area of expertise.

In this article, I aim to share key insights from the session on three key concepts and provide a foundational understanding of the principles and practices that define the world of bankruptcy law.

The Automatic Stay

The automatic stay is a foundational concept in bankruptcy and an ideal starting point for discussions with non-bankruptcy practitioners. As its name implies, the stay takes immediate effect upon the filing of a bankruptcy petition. It generally halts all actions against the debtor—the individual or entity initiating the bankruptcy—and their property. 

Designed to be both comprehensive and protective, the automatic stay is intentionally broad, but it is not without exceptions. For instance, criminal proceedings are not subject to the stay. This exception is logical; imagine the disruption if a prisoner on death row could delay an execution simply by filing for bankruptcy. Similarly, certain family law matters are excluded from the stay, provided they do not involve the division of the debtor’s property. Actions such as establishing or modifying child support, determining custody or visitation rights, or resolving paternity issues are allowed to proceed.

Another critical exception applies to serial bankruptcy filers—individuals who file for bankruptcy more than once within a one-year period. In such cases, the stay may be limited to 30 days or may not take effect at all unless the court issues an order imposing it. This limitation is particularly relevant when the debtor has filed two or more bankruptcy cases within a single year.

When in doubt, cease all actions immediately upon learning that an opposing party has filed for bankruptcy. Any actions taken in violation of the automatic stay, even without prior knowledge, are void ab initio. Deliberate violations of the stay, however, can lead to significant sanctions against the non-debtor party.  

Section 362(b) of the Bankruptcy Code outlines 29 categories of actions exempt from the automatic stay, many of which are highly nuanced and fact-specific. To navigate these complexities, it is prudent to seek a “comfort order” from the Bankruptcy Court whenever there is uncertainty about whether an exception applies. Bankruptcy judges routinely grant such orders, as they are instrumental in ensuring compliance with the automatic stay. Moreover, obtaining a comfort order reassures the non-bankruptcy court that any continued proceedings in its jurisdiction are not in violation of the Bankruptcy Code.

Property of the Estate

Here’s how I explain “property of the estate” to my clients: Imagine that when someone files for bankruptcy, an invisible bucket is created. All of that person’s assets are then placed into this bucket. That bucket represents the property of the estate. Simple enough, right? Generally, yes—but in practice, it often surprises people.  

For example, I can’t count the number of times potential debtors have confidently stated, “I don’t own anything.” That declaration always leads to an engaging conversation when I ask if they’re wearing someone else’s watch or using someone else’s iPhone.  

The takeaway is this: Bankruptcy courts interpret the term “property of the estate” as broadly as possible. It encompasses virtually all assets, no matter how minor or seemingly insignificant. As a result, debtors are required to disclose all property in their bankruptcy schedules, ensuring full transparency to the court.  Here are some real-world examples of assets that fall into the “bucket” for purposes of determining property of the estate in bankruptcy:

Clothing  

Yes, even your clothes are part of the estate and must be disclosed on your schedules. Thankfully, you don’t need to list every item individually. Generally, the court is interested in high-value items like fur coats (though unlikely in Florida!) or designer suits. Everyday clothing is typically of minimal concern.

Potential Causes of Action

If you slipped and fell at McDonald’s on Monday and filed for bankruptcy on Tuesday, your potential claim against McDonald’s is unquestionably “in the bucket.” Any legal claims or causes of action you have at the time of filing become part of the estate.

Inheritances

An inheritance doesn’t count if your loved one is still alive, as they could change their will. However, if the inheritance is in probate at the time of filing, it is considered property of the estate and firmly “in the bucket.”

Tax Refunds

Pending tax refunds, including those from the prior tax year, are typically included in the estate. This can become more complex when filing taxes jointly with a non-bankruptcy filing spouse, but the refund attributable to the debtor is generally “in the bucket.”

Engagement Rings and Wedding Bands

While this is often a sensitive topic, engagement rings and wedding bands are unequivocally considered property of the estate. They must be disclosed and are treated like any other asset.

Exempt Property

Now that we’ve identified what’s in the “bucket,” the next step is determining what can be removed. These removable items are known as exempt property. Fortunately, Florida provides a significant advantage to debtors by “opting out” of the limited federal bankruptcy exemptions. Instead, Florida allows debtors to utilize the far more generous exemptions outlined in the Florida Statutes and the Florida Constitution, offering greater protection for certain assets.  Here are the most commonly used exemptions in Florida bankruptcy cases:  

Personal Property Exemption – Up to $1,000

Although this may appear modest at first glance, Florida offers more comprehensive exemptions that significantly enhance the overall benefit and make the process more manageable.

Unlimited Homestead Exemption

The unlimited homestead exemption is the crown jewel of Florida’s bankruptcy exemptions because a home is often the most valuable and essential asset a debtor owns. Provided the property qualifies under Florida’s homestead rules, it is entirely removed from the “bucket.”  To retain the property, you must of course continue paying your mortgage, as mortgage lenders are among the few creditors (alongside holders of mechanic’s liens and taxing authorities) who can force the sale of a homestead. But, having an unlimited exemption for your homestead certainly is a tremendous benefit that most States do not offer. 

Personal Property Exemption – Up to $5,000 (Wildcard)

If you do not own a home or choose not to claim a homestead exemption, Florida allows a “wildcard” exemption of up to $5,000 for personal property. This provides additional flexibility for those without a primary residence.

Retirement Accounts, Pensions, and Social Security Benefits

All retirement accounts, including IRAs, 401(k)s, pensions, annuities, and Social Security benefits, are fully exempt under Florida law. This reflects a public policy goal of encouraging retirement savings and preventing individuals from becoming dependent on state resources in later years.

Vehicle Exemption – Up to $5,000

Florida’s vehicle exemption was recently increased to $5,000 as of July 1, 2024. Previously, it was capped at just $1,000. While still modest, this increase offers more significant protection for debtors.

Tenancy by the Entirety (TBE) Property

Florida uniquely recognizes tenancy by the entirety for all types of property, not just real estate. This includes vehicles, boats, bank accounts, brokerage accounts, and more. If you own property jointly with your spouse and your spouse is not a co-debtor on your liabilities, that property is entirely excluded from the bankruptcy estate.  

These exemptions underscore Florida’s debtor-friendly approach, providing robust protections for personal and jointly owned assets.

Once all applicable exemptions have been applied, any remaining items in the “bucket” must be monetized by the Bankruptcy Trustee, unless their value is so minimal that they are abandoned. While this reality can be unsettling for clients, it’s important to remember that creditors also have rights in the bankruptcy process.  

That said, the Trustee isn’t going to show up at your doorstep to seize assets. Trustees generally prefer to resolve these matters by allowing debtors to “buy back” the unprotected assets. This essentially means exchanging a monetary payment for the right to retain certain items. While the concept of buying back one’s own property can feel counterintuitive, Trustees are typically practical and open to negotiation.  

For example, the Trustee may discount the value of an asset to reflect the costs and logistical challenges the estate would incur in selling it. This makes it less burdensome for debtors while fulfilling the Trustee’s duty to creditors. Additionally, you can selectively choose which items to retain and which to surrender, giving you control over the process.  

If a monetary agreement is reached, Trustees are often flexible and willing to work with debtors to establish a payment plan, making the process manageable and ensuring compliance with the bankruptcy proceedings.